Corporate earnings season for Q1 is now about halfway completed. So far, modest expectations have been exceeded.  Coming in, investors expected a 6.3% drop in profits.  Now a 4.2% decline is expected.  Here are year-over-year earnings forecasts for the rest of 2023 and 2024, according to FactSet:


        Q1 2023                (4.2)%
        Q2 2023                (5.0)
        Q3 2023                1.6
        Q4 2023                8.5
        CY 2023 0.8
        CY 2024 11.9

These future projections are too rosy in our view.  As inflation continues to ease (and it is), profit margins should continue to come down, pressuring growth rates.  2024 projections especially look too optimistic, even given easier comparisons.

The FOMC will announce its latest decision on interest rates tomorrow, and Fed Futures are pricing in a near certainty of a 25bp hike that will take the Fed Funds target rate to a range of 5.0% to 5.25%. After that, we expect the Fed to hold pat with possible rate decreases later in the year, especially if our economy goes through the most anticipated recession ever.  Why?  Inflation continues to ease.  We will stick with our April commentary projection that the June CPI print will likely be in the 2s.  Yes, the Fed and investors remain concerned about still elevated inflation, but we see considerable progress being made.

Here are a few highlights from Barron’s Spring Poll of institutional money managers:

Investment outlook for U.S. equities in next 12 months:

Bullish           36%
Bearish         28%
Neutral          36%

With sentiment pretty evenly split, no wonder U.S. equities remain in a trading range.

Biggest risk to stocks in the next six months:

U.S. recession                                       24% of respondents
Rising interest rates/                              23%
  tightening financial conditions
Disappointing corporate earnings          20%

Not surprising to us, higher inflation was only the fifth biggest risk at 8% of respondents.

We would summarize the rest of 2023 as a battle between earnings falling and a moderating interest rate picture as the Fed gets closer to being done with rate hikes.



The S&P 500 is up 8% YTD through April, but other benchmarks (Dow Jones Industrials, Small Caps, S&P 500 Equal Weight, Dividend Focused) are only up low single digits and are more representative of the broader market.  To be specific, zeroing in on only a handful of FANG+ stocks, their collective market cap accounts for a quarter of the total S&P 500 market cap but 80% of this year’s gains.  Apple and Microsoft alone account for close to 40% of the S&P 500’s move higher.

 U.S. equities are stuck in a trading range.  If you still want to call this a bear market, it has been about as savage as a koala.  If you are a bull, it is raging like a cow, not a bull.

Bull market cycles need themes, and it is looking like ‘A.I.’ (artificial intelligence) has the possibility to be the next big theme that drives the next megacycle, similar to what the P.C./internet and the smartphone/cloud did during the last two cycles.  Yes, A.I. could take jobs, but for stocks, the potential for an exponential increase in productivity and lower labor costs would be massive for profits.  We currently have A.I. exposure in client portfolios and plan on ramping that up as opportunities present themselves.

Bond investors have their own bull market ahead of them.  Even if rate cuts don’t happen later this year, a more stable Fed funds rate is a huge shift from last year’s rapidly rising rates.  And a recession would likely have the impact of lowering rates.  It is getting harder to find an economic indicator that is saying the economy isn’t already in a recession, let alone on the verge of one.  Fed officials sound out of touch when they describe the economy as ‘fine,’ ‘resilient,’ or ‘unbelievably strong.’  What are they looking at?

We are bullish on bonds but remain neutral on stocks due to a possible recession and overly optimistic profit forecasts.  A bear market has never bottomed before a recession started.